The MySuper Performance Test: Here’s why it is good for your personal super, but potentially bad for your ASX stock investments

In 2021, the MySuper Performance Test was introduced as part of the ‘Your Future, Your Super’ reforms. This was introduced at the time equity markets were rallying high, particularly small caps. But while equity markets recovered from a torrid 2022 as interest rates rose, small caps have not. And now some are suggesting this test is to blame.

MySuper Performance Test: Here’s how it works

It was introduced as a way for investors to see their super fund performed well. In FY24, it covered 57 total products that covered 15.7m accounts and over A$1tn in assets.

Why not just look at raw percentage returns? Isn’t that good enough? Perhaps, but the MySuper Performance Test takes it further. Where super funds have sold products that failed to meet the benchmarks, they have to write to their customers and tell them as such. when the product fails the test 2 years in a row, it is closed to new members until it passes a future test. Moreover, they might face heightened supervision from ASIC.

At first glance, what’s not to like? Don’t people deserve accountability for how their money is invested? Of course they do. But the fact that the government initiated a review into it last year showed some things needed to be wrong. The industry told the government that it had many unintended consequences including encouraging short-term decision making, incentivising super funds to ‘hug’ benchmarks and reduce investment flexibility.

It is working but hurting

Some are suggesting that this is why small caps are floundering whilst large caps like CBA and BHP are over-concentrated with superannuation investors’ money.

With the public shaming, you need to perform well as a fund manager. And why go out of your way to be active, when you can be passive? In other words, why try and beat the benchmark by investing in stocks outside it (risking underperforming the market) when you can just replicate the benchmark and make the same return?

As we wrote about earlier this month, ASIC is looking into how the IPO market – and the ASX generally – could be revived. In 2023-24, more companies left the ASX in the past 2 years than any 2 year period since the 1990s recession – whether being taken over, booted off or moving to another exchange. The idea is that listing on the ASX may be unappealing to companies and ASIC’s inquiry seeks to find ways to change things.

But one key idea came from Barrenjoey’s co-founder Guy Fowler who said the MySuper test – or at least fundies’ fear of failing them – was why. So fund managers just don’t want to risk investing in them. Now this is just one person’s view, yes.

Nevertheless, did you know how many of the 57 MySuper products ‘failed’ the test in 2024? None. Yes, that’s right, zero. Amongst trust platforms, there were 192 and only 10 were first time fail and 27 were ‘repeat fail’. These accounted for 17,000 accounts (covering $1.8bn) out of 172,600 members (covering $18.8bn).

So while the MySuper test may prevent your super balance from fluctuating much more than the market, it could be why money outside your super invested in small cap shares isn’t going that far.

Conclusion

Now the MySuper Performance Test is not the only reason why small caps in Australia haven’t been the same since the end of the pandemic.

Other factors are at hand too including floundering battery metal prices, high inflation and interest rates, consolidation amongst fund managers and it came to light that some small caps had no realistic prospects of success, only rising because of certain external factors that investors felt would impact them but wouldn’t (like pot liberalisation in North America). And of course, some small caps have done well – but they’re in the minority.

There will be some reforms – we think dual class shares will happen. But the MySuper Performance Test could well be a factor, and addressing this will be easier said than done.

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